I have a client who had 6 rental properties in a corporation that also performed other services (active income). The corporation was sold to a new owner who did not want the rental properties, so they were sold back to my client at supposedly FMV (6 @ $65,000 = $390,000). I don’t have exact dates, but the properties were purchased between 1990 and 2000. The corporation was sold in 2016. My client has owned the rental properties personally for the last 4 years. In 2017 he set up a new corporation to perform transportation services among northern communities (spurred by the shut-down of the provincial bus service). Now he is thinking about transferring the rental houses into that corporation.
He wants my advice - whether and how to transfer these properties into the corporation.
He argues that the market value of the properties is much lower than the $390,000 he paid, because they are all 50+ year old mobile homes, and this year the insurance companies refuse to insure them (and without insurance, a buyer could not get financing). The land has some market value, but is located in a small northern town (Zone A for the northern residents deduction), so maybe $20,000 each.
Apart from the taxation of passive income (corp vs personal), and the possibility of generating a future CDA balance in the corporation, are there other issues I should consider? Is it worth considering Section 85? I’m thinking not, if his “tax cost” is greater than FMV.
My two cents… never guess at FMV… ALWAYS get an appraisal from an accredited appraiser ( not a realtor) then based on those results… make the determination as to what is best for the client. Yes, this will cost a few $… but it is necessary if he wishes to have CRA agree with his low figures should there be a review or audit.
Yes, of course. I have told him he needs to do that in order to establish FMV. But what difference would it make? Suppose the appraisals show each property as FMV of $75,000. Should that change his decision whether or not to transfer them to the corporation? What if the FMV of each is $55,000 - should that change his decision? Why or why not?
Ok, so perhaps I should ask if he expects to have capital gains in the future, which these net capital losses could offset.
Still, the only benefit I see in having them in the corporation is a possible CDA balance on future sale. From what I’ve seen, he doesn’t have much other personal income, so the net rental income would be taxed at a higher rate in the corp than on his T1.
As far as capital losses go, you might want to check the stop-loss rules since your client and his corporation would be affiliated. I think the superficial loss rules would apply. Also, if the client has claimed CCA on the properties, there could be a recapture issue, depending on what the values turn out to be.
I normally use S85 for transfers to a corporation because you can include a price adjustment clause that might limit the damage should CRA put different values on assets.
I don’t see any reason why your client wants to transfer the properties to a corporation other than trying to claim a capital loss that might be denied anyways. If he can’t get insurance on the properties owned personally, I don’t think a corporation is going to help that issue.
Also the CDA account in the corp adds no benefit over holding the properties personally.
On the same thread as the other posters, the question does come to mind…
Why does the client want them in the Corp? What benefit does he hope to get from this?
There are legal costs for transfers as the title would need to be switched and your time.
The corp tax rate on passive income isn’t likely to be better unless his personal income goes up.
Also, not to forget, the rental income monies are now “stuck” in the corp and not available for personal use.
The reason he wants them in the corp is for legal protection - his second wife passed away in 2018 - her family (otherwise unrelated to him) believes they are entitled to 50% of his personal assets. Some of the properties may have had her name on title…
I forgot about the superficial loss rules - thanks for reminding me.
Ohh… Definitely would follow the legal advise on that one… if his lawyer thinks this will help.
If his deceased wife’s estate is successful in establishing a claim against his assets, I don’t think it will matter that he has put them in a corporation. A good lawyer can have that undone.
I don’t have a copy of the will, but my client mentioned that she willed all of her belongings to her siblings and children (not her husband). My client believes that they coerced her to change her will shortly before she died - she had cancer and may not have been mentally capable of understanding what she was doing.
Yes, I know. That’s part of the reason I’m trying to figure out if there are any reasons to consider it.
My client looks at it this way - if his late wife hadn’t persuaded him to sell the original corporation to her uncle, the properties would all still be “his” - held in that first corporation.
The other part of it is that his previous accountant (now retired) told him that the rental income would be taxed a lower rate in the corporation. Not sure why - perhaps years ago, he had significant personal income, and the rental income would have put him in a higher tax bracket. I’ve been trying to explain that is not necessarily true in his current situation, but he has trouble understanding the concept of corporate-personal integration.
There are not many times when incorporating investment income gives you a tax advantage. Putting the properties in a company doesn’t necessarily provide any creditor-proofing because the creditor will just go after the shares of the company that he owns or debt he’s taken back. Sounds like you have your hands full with this client. Good luck.
Hi Nezzer, I think if your client is able to convert corporate passive income (rental income) generating from 6 rental properties to active business income by hiring more than 5 full time employees throughout the taxation year, then it would be good idea to transfer 6 rental properties to the corporation. Otherwise corporate passive income will be taxed at least 50% tax rate and dividend need to pay out to shareholder in order to receive refundable dividend tax. Due to Canadian tax integration system, there is no much tax difference while you are holding rental properties personally or through corporation. I think the only the tax advantage to hold investment inside corporation is to use fund generating from active business income ( which is taxed around 11% in BC compared to 20% or more personal tax rate) to buy investment and hold it for long run to generate capital gain (half of capital gain is tax free while flow to shareholder). Therefore at least 9% tax deferring can help your investment compound faster.